The protesting farmers are still on the roads, demanding a law for MSP. Why is the government holding on to its position? It is important to understand the complexities of MSP and the various points of view.
During the fifth round of talks with the Centre, farmers wanted the government to respond in ‘yes’ or ‘no’ to their demands of rollback of the three farm laws. Photo: Gaon Conection
Farmers are firmly camped in the country’s capital New Delhi in protest against the agricultural laws. There have been many rounds of talks between the government and the agitating farmers but no solution as yet.
Samyukt Kisan Morcha, which is leading the farmers’ stir, has put forth a law for MSP (minimum support price) as its major demand, besides the repeal of the three new agricultural laws. It has demanded that the government continue procuring at MSP and also declare procurement at a price lower than MSP as an offence.
Although the prime minister and members of his council of ministers are constantly trying to assure farmers that the MSP system will prevail, there is no promise to bring out a law on MSP, something the farmers want. The government’s argument is that MSP did not have legal recognition even earlier. Why is the government not accepting this demand? What is MSP and how is it implemented?
MSP is a kind of guarantee the central government gives farmers, on the price of certain food grains. It procures crops at MSP to provide food grains to the economically underprivileged under the public distribution system (PDS), commonly called the ration system. Even if the market price of the crops falls, listed crops are procured from farmers at MSP, shielding them from loss. The MSP is the same for a crop across the country, and at present, 23 crops are supported by MSP. This is fixed on the basis of the recommendations of the Commission for Agriculture Cost and Price (CACP), under the Union ministry of agriculture.
The Shanta Kumar Committee, which was formed to suggest restructuring of the Food Corporation of India (FCI) in the year 2015, had in its report stated that only six per cent of the country’s farmers had access to MSP. At present, the number of farmers in the country is 145 million; six per cent of this would be 870,000 farmers who have access to MSP.
Before the 2019 general budget, Gaon Connection, India’s largest rural media institution, tried to find out rural India’s expectations from the Modi government by conducting a survey among 18,267 farmers in nine states, whereby 43.6 per cent of the farmers surveyed asserted that not getting a fair price for their crops was their biggest issue.
Since 2009, the Commission for Agricultural Costs and Prices decides a crop’s MSP based on cost, demand, supply, price fluctuations, market price trend, various costs and international market prices. The agriculture ministry says the cost of production also includes cost of land and family labour. This means, agricultural wages are also considered while setting MSP.
To derive MSP, the cost of cultivation into three parts — A2 or cost incurred by farmers for crop production such as seeds, fertilizer, fuel and irrigation; A2 + FL, which covers estimated wages of the farmer’s family to the cost of production, besides cash expenditure; and C2, the rent of the farmland and the interest on total agricultural capital.
Presenting the budget on behalf of the central government in February 2018, then finance minister, the late Arun Jaitley had claimed that farmers would get a price at least 1.5 times their cost. The CACP report revealed the MSP was fixed at A2 + FL cost.
In 2006, the National Commission on Farmers constituted in the year 2004 under the chairmanship of agricultural scientist MS Swaminathan advocated the farmers be paid the price of the crop at C2. This did not happen.
What are the hurdles before the government in granting legal status to MSP? Pramod Kumar Joshi, honorary director, Centre for Agricultural Economics Research (AERC), University of Delhi told Gaon Connection that “it is very difficult to make MSP mandatory by law. It does not exist anywhere in the world. A law on MSP would mean the right to MSP. Those who do not get MSP would then be able to move court, and those not giving MSP would be penalised”.
Joshi cautioned that people should also see the other side of the issue. “Suppose, there’s a glut in production of maize or dal and prices fall in the market, who will buy that crop? Companies will not buy crops at a lower price, fearing the law. The crop will remain with farmers,” he said.
There is always a ‘fair average quality’ set for crops procured at MSP, Joshi said. “It means that based on a certain standard quality, the farmer gets MSP. If the crop fails to meet the quality standards, how will it be procured at a fixed price, after the enactment of a law? Traders would face major difficulties,” he added.
Agriculture policies expert and agricultural economist Vijay Sardana feels that if the central government makes MSP compulsory by law, the biggest challenge before it would be that of funds. “The move will also result in import of agricultural products,” he told Gaon Connection. “The central government’s annual earnings are Rs 16,500 billion. If it were to procure all 23 crops at MSP, it may have to spend more than Rs 17,000 billion for it. If the government makes MSP mandatory by law, it will be applicable to all crops, not just paddy or wheat. The government will spend about 85 per cent of the total budget for providing MSP,” he said.
Sardana expressed concern that if the pressure on the government’s revenue mounts, it would impact other welfare schemes that benefit the underprivileged. “The government also provides subsidy to farmers on fertilisers and agricultural implements of around Rs. 100,000 crore. It will then either have to reduce subsidies or increase the cost of electricity, water and health facilities,” he said.
“In the international market, the price of our produce is higher than many countries. If MSP is made mandatory, the government will not be able to stop traders from imports. It will then have to buy all crops from farmers. To fund this, taxes will have to be increased by about three times, increasing taxpayer burden,” he said.
Sardana also pointed out that about 85 per cent of small farmers in the country also bought foodgrains. More MSP would hit their budgets too.
Pramod Kumar Joshi said India also received flak from the World Trade Organization (WTO) due to its subsidies. “We have to remind them that India has poverty and we need to subsidise food,” he said.
“We need to open up our agricultural markets. We are still exporting many crops after subsidising them, which means that subsidy is given to grow and trade crops,” he told Gaon Connection, and cited the example of Cambodia and Vietnam that have opened up rice markets, reduced poverty and increased farmer income. “We are trying to go backwards in agriculture,” Joshi added.
WTO counts MSP among bad subsidies, because it affects the market. India faces stiff opposition from developed countries for its subsidy policies.
The WTO allows developing and developed countries to provide 10 and five per cent agricultural subsidy, respectively. However, India has maintained since 2014 that the subsidy given by it is even lower than in the developed countries. According to a June 2020 report by the Centre of World Trade Organization Studies, New Delhi, the total amber box subsidy (that affects domestic production and world trade) in US dollars per farmer is $7,253 (Rs 5,34,694) in the US, $7,414 (Rs 5,46,563) in Canada, $1,068 (Rs 78,733) in the EU and $3,482 dollars (Rs 2,56,694) in Japan. India’s subsidy is just $49 (Rs. 3,612).
Food and export policy expert Devinder Sharma wondered why the country’s prominent economists were not talking about making MSP into a law. “The countries opposing India’s subsidies give huge subsidies in their own country. Only 1.5 per cent of the US population is involved in agriculture, yet it shoulders a debt of 425 billion dollars (Rs. 425,000,000,000).”
“Look at America’s dairy sector,” said Sharma. “Since 1970, ninety three per cent of dairy farms have closed in the US, yet their milk production is increasing every year. The entire business is now run by the big companies. This will happen in our country too. Politics does not mean pointing fingers at opposition parties. After all, they all have to contest elections after five years.”
What difficulties will India face in the international market if a law on MSP comes into force? Legal scholar and policy analyst Shalini Bhutani, who has written about agricultural laws in the global context told Gaon Connection that while we have so far maintained that agricultural subsidies cannot be stopped due to food security policies, if MSP is made mandatory through law, we could land in trouble with exports.
What is the way out of this? “The government should develop the market within the country. We should meet our needs. Despite bumper yields, there is starvation. It is time the policy-makers and policy analysts thought of something new, because developed countries will not allow us to operate in the international market,” she said.
Vikrant Singh, founder and chairperson of the Finance and Economics Think Council, Banaras Hindu University (BHU), writes consistently on agricultural issues. He told Gaon Connection that though the agriculture sector is not profitable at present, the future belongs to it. “We need to understand that the biggest hurdles in giving legal sanction to MSP are the big capitalists of the country. The more-than 700 buyers who registered since the new agricultural laws came into being will constantly face the threat of legal action if a farmer decides to move the court against them.”
The fear of farmers over MSP was affirmed in the survey ‘The Indian Farmer’s Perception of the New Agri Laws’ conducted by Gaon Connection. A rapid survey among 5,022 farmers in 53 districts of 16 states showed that 59 per cent of those surveyed believed MSP should become a compulsory law, while 39 per cent of farmers feared that with the new agricultural laws, the government would stop buying crops at MSP in future.
Singh alleged that the Indian economy is shifting in favour of monopolistic powers. “When he was Gujarat chief minister, Narendra Modi had submitted a report to the then prime minister Manmohan Singh demanding a law on MSP. After Modi became the prime minister, the CACP demanded that MSP should get legal recognition in order to facilitate doubling of farmer incomes,” he said.
Why do farmers want these laws? “The most basic requirement is that they get a decent price for their produce,” Singh said. “A law on MSP will not harm farmers at all. The government is paying MSP even now, but middlemen are eating into it. If the law on MSP is enacted, farmers will definitely get the money. The benefit of MSP can reach fifty per cent of farmers, from six per cent.”
Sanjib Mukherjee, agriculture editor at Business Standard, believes it may not be easy to make MSP legally binding. “We have had numerous precedents,” he said. “In the past, when the Maharashtra government had disallowed the purchase of soybean below a certain price, traders reduced procurement. After negotiations, they bought, but only good quality soybean, leaving farmers to deal with the rest. The solution to this problem is that the government reconsider what crops MSP is really needed for,” he said at Gaon Connection’s Gaon Cafe.
Chandrasen, a retired professor from the department of agricultural economics at Banaras Hindu University (BHU), told Gaon Connection that “one of the solutions may be that the government consider schemes that benefit farmers directly, like the Kisan Samman Nidhi scheme, or increase the budget under Kisan Samman Nidhi”.
This, he said, would help stabilise market rate, benefit farmers and “we won’t have to face confrontation at the WTO. Further, farmers also need to go beyond the cultivation of paddy or wheat and understand and respond to the market”, he added.